Trading firm sues rival, attacks CME

A Chicago trading firm sued a rival in federal court, alleging manipulation in the U.S. Treasury futures market, and the firm's lawyer faulted exchange operator CME Group for a lax response.

Failing to get any traction in a CME Group arbitration process, Chicago trading firm HTG Capital Partners filed a federal lawsuit yesterday against another firm it says manipulated CME's futures market.

HTG was the victim of “egregious manipulation” for at least 20 months, from January 2013 through August 2014, the firm said in its filing with the U.S. District Court for Northern Illinois, alleging that the unnamed defendant engaged in “spoofing,” or the practice of placing orders with the intent of canceling them for monetary gain. HTG pressed similar claims with CME last year.

This practice enabled the defendants "to manipulate the market to their benefit, and to the detriment of HTG and other market participants,” HTG says in the lawsuit.

A HIGH-PROFILE CONNECTION

The case is striking not only for its allegations, but also because HTG is led by Chris Hehmeyer, who is also chairman of the industry-led self-regulatory organization called the National Futures Association. Hehmeyer's inability to get a satisfactory reaction from CME with regard to similar charges last year through an arbitration process underscores the difficulty of addressing the behavior.

HTG attorney James Kopecky said in an interview that his client is seeking to recoup at least a half-million dollars in losses and, if granted court authority, to seek a million dollars in damages.

But he said his client's chief concern is in rooting out unfair trading practices in the world's largest futures market. The lawsuit says there were nearly 7,000 instances in which HTG suffered as a result of the manipulation and it detailed three such situations.

'INCREDIBLY FRUSTRATING'

HTG made similar allegations last August against Chicago high-speed rival Allston Trading as part of a CME arbitration process that Kopecky said has been “an incredibly frustrating process” lasting now more than a year.

Kopecky, an attorney at Chicago law firm Kopecky Schumacher Bleakley Rosenburg, said he couldn't talk about the details of the arbitration process because of a confidentiality agreement, but he confirmed reports that Allston is the target of those claims. He declined to say whether the defendant in the lawsuit filed this week is also Allston.

A spokeswoman for Chicago-based CME declined to comment on the case or the arbitration. A spokesman for Allston didn't immediately have a comment.

HTG alleges in the lawsuit that the manipulative behavior occurred at CME's Chicago Board of Trade in the market for U.S. Treasury futures. CME also operates the Chicago Mercantile Exchange and acts as a self-regulatory organization overseeing and enforcing legal conduct in the markets.

NEW RULE

The CME last year adopted a new rule that “spoofing” is prohibited, though it said at the time that such practices have long been illicit. The Commodity Futures Trading Commission also outlawed such behavior with a provision against “disruptive practices” in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

Kopecky acknowledged that the manipulative activity had decreased since HTG first made claims last year. Still, he faulted CME for not policing the market more effectively or responding more swiftly to the allegations raised in the arbitration. He criticized CME for stonewalling on the arbitration case and said his client will seek to force CME to disclose the names of the firms engaging in the manipulative behavior if necessary.

“We have a huge fight ahead of us,” said Kopecky, a former Securities and Exchange Commission enforcement attorney. “Chris and HTG have taken a stand here and they want to know who's doing this.”

ONE CULPRIT?

HTG said in the lawsuit that it suspects there's one culprit behind the behavior because of a pattern of placing an order to buy or sell contracts that builds momentum in the market, then a quick cancellation of the initial orders by the defendant, before a final flip to place orders opposite of the initial trade and profit from a market shift.

“The unmistakable pattern of repeated buildups, cancels and flips provides strong evidence of the (defendants') intent to accomplish the manipulative spoofing described above for their own economic gain and to the detriment of other market participants,” the lawsuit alleges.

In addition to losing money on the trades, HTG said in the lawsuit that it was forced to reduce its trading activity as a result of the manipulation and devote resources to developing strategies that would protect against it.

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